Four Hidden Costs of Turnover and Tangible Strategies to Increase Retention

For operators in the restaurant industry, facing all too familiar workforce pressures in 2022, greater retention should be this year’s focus. 

The sector is on the heels of what the Washington Post dubbed “the most unusual job market in American history,” compounded by a newly familiar list of challenges: supply chain woes bearing down on procurement, a broader shift from onsite food consumption to app-based food delivery services, and escalating arms race of compensations and benefits among operators competing for an ever-shrinking pool of talent. 

Hospitality employees separated from their jobs at a rate of 6.8 percent in August 2021 according to St. Louis Federal Reserve Bank numbers, more than double the average for all other industries. The Bureau of Labor Statistics states that some 890,000 workers in the sector quit their jobs in a single month. 

In 2006, the Cornell Center for Hospitality Research estimated that the average cost to an employer per turned-over employee amounted to $5,864. Accounting for inflation, $1.00 in 2006 is equivalent to about $1.38 today, making the current cost roughly $8,092 per employee. For a business with 100 employees, assuming 75 percent turnover rate, the final figure would be $606,900 annually. 

In normal economic contexts, cost estimates like the one in Cornell’s figure are known and planned for. Before the pandemic, however, industry headwinds did not impact the bottom line enough, and often went unnoticed as a result. Current turnover levels have compounded the cost to employers, now becoming a significant expense that must be addressed. Below, we identify four hidden costs of high turnover – and what action to take to reverse them.

Unrealized Work Opportunity Tax Credits (WOTC)

Work Opportunity Tax Credits are a federal credit available to employers who hire individuals from eligible target groups that typically face significant barriers to employment. These target groups include: 

  • Veterans
  • Temporary Assistance for Needy Families (TANF) recipients
  • Supplemental Nutrition Assistance Program (SNAP, or “food stamp”) recipients
  • Designated community residents
  • Vocational rehabilitation referral
  • Former convicted felons
  • Supplemental Security Income (SSI) recipients
  • Summer youth employees
  • The long-term unemployed

Employers can earn a tax credit of between $1,200 and $9,600 per employee, depending on the target group of the new employee and the number of hours worked in the first year. 

Employees must work at least 120 hours in the first year of employment to receive the credit. To illustrate the impact, assume a claims average of $1,800 per qualified employee, and a qualification rate of more than 25 percent. For an operator with 100 employees, that equates to a $45,000 opportunity loss. 

Restart of Federal and State Unemployment Taxes 

Another hidden cost of high turnover is restarting both the federal unemployment and state unemployment taxes. Every time a restaurant hires an employee to replace someone that has left them, they must in turn pay new federal unemployment and state unemployment taxes. 

Take the example of a restaurant operator in Tennessee with 100 employees. The restaurant industry’s turnover is an average of 73 percent, the federal unemployment tax rate is 0.6 percent, and Tennessee’s state unemployment tax “intro rate” is 2.7 percent. Crunching the numbers, the potential impact of 73 percent turnover on additional federal unemployment tax spending is $3,066 annually. On state unemployment tax, the impact is $13,797 annually. 

With a total annual additional spend of $16,863 in payroll taxes, restaurant operators are potentially losing another $231 in payroll taxes for every employee that turns over. This, combined with the unrealized WOTC credits, these two factors alone account for over $60,000 annually. 

There is much being said about strategies to retain employees, with a lot of focus being placed on the “soft” benefits and tactics operators should consider. I’ve previously written an article on my thoughts regarding those topics. However, we work with many restaurant operators throughout the country, and there are a few tactics that seem to be making an impact. I want to provide a few concrete, operational, tactics operators can deploy to address the issues I highlighted above.

Increasing Financial Wellness with Access to Earned Wages

First, there is rising demand by employees in the restaurant industry for the ability to have access to their earned income prior to the traditional “check day.” Daily pay options allow the employees to access a percentage of earned wages, which can enable them to reduce or remove their reliance on payday loans, borrowing from friends and family, paying bills late, etc. If employees increase their financial wellness, and associate their employer with helping them in this critical aspect of their lives, the potential for retention will certainly increase. 

Maximizing Autonomy and Flexibility 

The increased demand from employees to control their work schedule is well known. However, how do you introduce this to your workforce, and remain operationally efficient? There are third-party time and attendance solutions in the market today that make this extremely easy and transparent. They allow for employees to coordinate shifts with their managers, and swap shifts with coworkers who are eligible. The employer has full visibility of these transactions and can create parameters that enable the company to maintain efficiency. 

For example, if an employee is approaching overtime hours, the employer can create a rule within the system that will not allow them to pick up additional shifts, or swap for a shift that will put them over regular time. The bottom line is that employers must maximize employee choice wherever possible. 

A Final Note on WOTC: Prioritize Employees who Qualify

Lastly, an added benefit of this type of solution is that operators can track the work hours of the employees that qualify for WOTC credits. These credits are tracked and earned by hours worked. Employers would now be able to prioritize shifts to these employees and increase the chances of earning the credits. 

Additionally, WOTC-qualified employees should be closely tracked, and every effort should be made to retain these employees for not only the obvious financial reason, but also for the positive socioeconomic impact it will have on those demographics overall.

700,000 Reasons to Address the Problem of Turnover

The dollar-to-dollar impact of the above scenarios cover about $700,000 – and of course, these are only examples. At a time when restaurants across the U.S. are struggling on multiple fronts to maximize employee retention, loss from high turnover impacts their potential to further transform operating models, investing in customer and employee experiences. For each establishment, there will be different reasons and different specifics for tackling the issue. However, this is one resolution for 2022 to begin immediately.